20/03/19

The Cayman Islands has major shortcomings in its ability to analyse and understand the risks from money laundering and terrorism financing. Large money laundering investigations and prosecutions are non-existent and the use of the Financial Reporting Authority to initiate investigations is benign, the latest mutual evaluation report by the Caribbean Financial Action Task Force has concluded.

The problems partially stem from a national risk assessment, conducted in 2015, that, given Cayman’s role as an international financial centre, did not focus enough on international money laundering and terrorism financing threats.

The regional affiliate of the Financial Action Task Force, the global standard-setting body in anti-money laundering, found that the risk assessment provided a “fair level” of understanding. However, it did not contain an assessment of legal persons or arrangements, nor did it include a sufficient analysis of risks faced by parts of the financial sectors that are not subject to supervision, like lawyers or excluded persons under the Securities and Investment Business Law.

“This has resulted in major deficiencies that have inhibited the jurisdiction’s ability to analyse and understand its risks,” the mutual evaluation report stated.

The high-level summary of the national risk assessment, therefore, did not contain enough information to help develop a comprehensive understanding of all the money laundering and terrorism risks faced by Cayman entities.

The evaluation of Cayman’s anti-money laundering rules and practices was adopted by the CFATF Plenary held in Barbados in November 2018, but only published on Tuesday. Based on a visit to the Cayman Islands in December 2017, the report analyses the level of Cayman’s compliance with 40 Financial Action Task Force standards to combat money laundering and terrorism financing.

On a positive note, the CFATF assessors detected “a solid and highly professional institutional framework” and found that almost all financial and non-financial representatives they interviewed “displayed a solid understanding of risks and are skilled in applying relevant control measures”.

The CFATF further credited Cayman with “a high level of commitment” to ensuring the anti-money laundering framework is robust and capable of safeguarding the integrity of the jurisdiction’s financial sector.

The cooperation and coordination in the Cayman Islands through the Inter Agency Coordination Committee and the Anti-Money Laundering Steering Group works well, the CFATF said, but it requires further integration and cooperation among law enforcement organisations and the Financial Reporting Authority at the operational level.

Although money laundering offences are investigated and prosecuted, this involved almost exclusively minor domestic predicate offences. Given the shortcomings of national risk assessment, the report noted, this “may not be fully commensurate with [Cayman’s] risk profile”.

While money laundering investigations and prosecutions focus on the identification of assets that could be seized, the results are “modest” and there could be greater use of civil forfeiture.

Despite the resources available to the Royal Cayman Islands Police Service and the Office of the Director of Public Prosecutions, “large and complex financial investigations and prosecutions have not been identified, or pursued, and there is limited focus on stand-alone [money laundering] cases and foreign generated predicate offences”, the report said, adding that there remain fundamental challenges in how the jurisdiction identifies instances of money laundering and terrorism financing for investigation.

The Financial Reporting Authority, which deals with all suspicious activity reports in Cayman, does not have the tools to assist investigative authorities in the identification of cases, the CFATF said.

Assessors found that the Financial Reporting Authority has not been able to sufficiently analyse and disclose the reports in time, nor does it have access to wider relevant information.

“The result is that there is a low level of usage of FRA’s disclosures to supplement investigations, and they have been used to a negligible extent to initiate investigations,” the report said.

Some of the legislative changes had not come in time for the assessors to evaluate their effectiveness. For instance, a risk-based supervisory regime for dealers in precious metals and stones, real estate agents and accountants had not been fully implemented.

In addition, the report said, more information should be collected on excluded persons under the Securities Investment Business Law, who must also implement appropriate anti-money laundering policies, procedures and controls.

In terms of transparency, basic information on legal persons is available through the General Registry’s website, but not for legal arrangements and exempted companies, the CFATF said.

Challenges also exist in the verification and ongoing maintenance of the ultimate beneficial ownership information in the case of partnerships where the information required does not include the beneficial owner.

The Cayman Islands government responded to the report’s finding by appointing a dedicated task force, made up of the premier, the attorney general, the deputy governor, and the ministers for financial services, commerce and finance, to oversee the implementation of a “comprehensive action plan”.

The task force will coordinate the implementation of the plan and lead the several initiatives with the aim of remedying the identified shortcomings within a year.